[Federal Register Volume 83, Number 13 (Friday, January 19, 2018)]
[Notices]
[Pages 2843-2846]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00857]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82501; File No. SR-OCC-2017-808]


Self-Regulatory Organizations; The Options Clearing Corporation; 
Notice of No Objection to Advance Notice, as Modified by Amendment No. 
1, Concerning the Adoption of a New Minimum Cash Requirement for the 
Clearing Fund

January 12, 2018.
    The Options Clearing Corporation (``OCC'') filed on November 14, 
2017

[[Page 2844]]

with the Securities and Exchange Commission (``Commission'') advance 
notice SR-OCC-2017-808 (``Advance Notice'') pursuant to Section 
806(e)(1) of the Payment, Clearing, and Settlement Supervision Act of 
2010 (``Payment, Clearing and Settlement Supervision Act'') \1\ and 
Rule 19b-4(n)(1)(i) under the Securities Exchange Act of 1934 
(``Exchange Act'') \2\ to propose a new minimum cash contribution 
requirement for its Clearing Fund \3\ (``Cash Clearing Fund 
Requirement'') and also provide for the pass-through of interest income 
earned on such deposits to its Clearing Members. The proposed changes 
are intended to enhance OCC's liquidity risk management by increasing 
the amount of qualifying liquid resources available, as well as to 
provide for a more consistent level of cash available in its prefunded 
financial resources. The Advance Notice was published for comment in 
the Federal Register on December 14, 2017.\4\ The Commission did not 
receive any comments on the Advance Notice. This publication serves as 
notice of no objection to the Advance Notice.
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    \1\ 12 U.S.C. 5465(e)(1). The Financial Stability Oversight 
Council designated OCC a systemically important financial market 
utility (``SIFMU'') on July 18, 2012. See Financial Stability 
Oversight Council 2012 Annual Report, Appendix A, http://www.treasury.gov/initiatives/fsoc/Documents/2012%20Annual%20Report.pdf. Therefore, OCC is required to comply 
with the Payment, Clearing and Settlement Supervision Act and file 
advance notices with the Commission.
    \2\ 17 CFR 240.19b-4(n)(1)(i).
    \3\ Unless specified otherwise, capitalized terms shall have the 
meaning OCC ascribes in its By-Laws and Rules.
    \4\ Exchange Act Release No. 34-82247 (Dec. 8, 2017), 82 FR 
59031 (Dec. 14, 2017) (``Notice of Filing of Advance Notice'').
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I. Background

    OCC maintains a Clearing Fund, composed of contributions required 
to be made by all Clearing Members, to make good losses suffered by OCC 
under a number of circumstances, including the default or failure of a 
Clearing Member to make good on any obligation for which OCC may be 
responsible in the exercise of its duties as a central counterparty. 
Presently, Article VIII, Section 3(a) of OCC's By-Laws provides that 
Clearing Fund contributions shall be in the form of cash and Government 
securities, but neither OCC's By-Laws nor Rules provides a minimum cash 
requirement for contributions to the Clearing Fund. Article VIII, 
Section 4(a) of OCC's By-Laws allows for OCC to invest cash 
contributions to the Clearing Fund, partially or wholly, in OCC's 
account in Government securities, and to the extent that such 
contributions are not so invested, they shall be deposited by OCC in a 
separate account or accounts for Clearing Fund contributions in 
approved custodians. Article VIII, Section 4(a) of OCC's By-Laws, 
however, presently does not account for the treatment of interest 
earned on cash deposits held in OCC's bank account at the Federal 
Reserve.

II. Description of the Advance Notice

A. Proposed Change To Establish the Cash Clearing Fund Requirement

    OCC proposes to establish a Cash Clearing Fund Requirement for its 
Clearing Fund to increase the amount of qualifying liquid resources 
available to OCC to account in the event there is an extreme scenario 
in the financial markets and OCC has to address any resultant liquidity 
demands. Further, the proposal seeks to ensure that OCC holds, and 
maintains access to, a more consistent level of cash clearing fund 
resources in its available prefunded financial resources. Specifically, 
the proposed rule change would require that Clearing Members 
collectively contribute $3 billion in cash to the Clearing Fund. Each 
Clearing Member's proportionate share of the Cash Clearing Fund 
Requirement shall be determined by the current Clearing Fund allocation 
methodology in OCC Rule 1001.
    OCC's current liquidity resources are sized to cover historically 
observed liquidity demands and potential demands based on forecasts 
with a 12 month time horizon. The sizing calculations, in turn, are 
based on the potential exposure resulting from the default of a single 
clearing member. Further, the current clearing fund is sized, at a 
minimum, to ensure that OCC maintains sufficient collateral to access 
its committed liquidity facilities. OCC represented that it maintains 
committed liquidity facilities of $3 billion to cover its calculated 
historical and forecasted demands.\5\
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    \5\ See Exchange Act Release No. 81058 (June 30, 2017), 82 FR 
31371 (July 6, 2017) (SR-OCC-2017-803); Exchange Act Release No. 
76641 (December 14, 2015), 80 FR 79114 (December 18, 2015) (SR-OCC-
2015-805). Both facilities allow OCC to obtain cash in exchange for 
government securities 60 minutes after notice is given and 
collateral is posted.
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    After analyzing its liquidity demands in extreme stress 
scenarios,\6\ OCC determined that it would propose the $3 billion Cash 
Clearing Fund Requirement to increase the amount and reliability of its 
liquid resources. OCC represented that, based upon its analysis, the 
peak stressed liquidity demands of the largest or two largest Clearing 
Members, which normally occur in conjunction with certain monthly 
expirations, could exceed the capacity of OCC's current committed 
liquidity facilities. Although OCC believes that it would be able to 
cover the resulting shortfall with cash already present in the Clearing 
Fund, OCC stated that it could not rely on such cash always being 
available because, under OCC's current By-Laws and Rules, there is no 
ability for OCC to ensure that a minimum amount of cash is maintained 
in the Clearing Fund at all times. As a result, OCC believes that the 
proposed $3 billion Cash Clearing Fund Requirement, combined with OCC's 
$3 billion of committed liquidity facilities, would provide liquid 
resources sufficient to cover the peak stressed liquidity demands of 
the largest one or two Clearing Members observed in the analysis.
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    \6\ OCC represented that it performed an analysis of its stress 
liquidity demands based on a 1-in-70 year hypothetical market event. 
Specifically, OCC started its analysis by selecting the largest 
historical peak monthly settlements that occurred over the 
historical look-back period of data generated by the stress test 
system. It then also selected certain large non-expiration days to 
supplement the analysis. From this it estimated the mark-to-market 
and cash settled exercise and assignment obligations for the members 
driving the historical peak demand under the proposed stress tests 
scenario to determine the stressed peak demand.
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B. Proposed Change To Allow Temporary Increase of Cash Clearing Fund 
Requirement

    The proposed change would also provide authority for OCC to 
temporarily increase the amount of the Cash Clearing Fund Requirement. 
OCC's Executive Chairman, Chief Administrative Officer (``CAO''), or 
Chief Operating Officer (``COO''), would have the authority, upon 
providing notice to the Risk Committee, to temporarily raise the Cash 
Clearing Fund Requirement up to an amount that includes the size of the 
Clearing Fund as determined in accordance with Rule 1001 for the month 
in question. A Clearing Member will be required to satisfy any increase 
in its required cash contribution pursuant to an increase in the Cash 
Clearing Fund Requirement no later than one hour before the close of 
the Fedwire on the business day following OCC's issuance of an 
instruction to increase cash contributions.
    In such circumstances, the Risk Committee, by rule, would be 
obligated to review any such temporary increase as soon as practicable, 
but in any event within 20 calendar days of the increase. In its 
review, the Risk Committee shall determine whether (1) the increase in 
the minimum Cash Clearing Fund Requirement is no longer required, or 
(2) OCC's Clearing Fund contribution

[[Page 2845]]

requirements and other related rules should be modified to ensure that 
OCC continues to maintain sufficient liquid resources to cover its 
largest aggregate payment obligations in extreme but plausible market 
conditions. In the event that the Risk Committee would determine to 
permanently increase the Cash Clearing Fund Requirement, OCC would 
initiate any regulatory approval process required to effect such a 
change.\7\
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    \7\ However, OCC represented that it would not decrease the Cash 
Clearing Fund Requirement while the regulatory approvals for a 
change in the Cash Clearing Fund Requirement are being obtained to 
ensure that OCC continues to maintain sufficient liquid resources to 
cover its liquidity demands during that time.
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    OCC acknowledged that increasing the Cash Clearing Fund Requirement 
could impose a liquidity constraint on its clearing members. 
Accordingly, OCC has proposed to limit the circumstances in which it 
could make such an increase. By rule, OCC would only be able to 
exercise this authority to protect OCC, its clearing members, or the 
general public. Further, any Cash Clearing Fund Requirement increase 
would have to: (i) Be based upon then-existing facts and circumstances, 
(ii) be in furtherance of the integrity of OCC and the stability of the 
financial system, and (iii) take into consideration the legitimate 
interests of Clearing Members and market participants.
    These changes would be reflected in new paragraph (a)(i) of Section 
3 of Article VIII of OCC's By-Laws, as well as in new Interpretation 
and Policy .04 to Section 3 of Article VIII.

C. Proposed Changes to Pass-Through Interest on Clearing Fund Cash to 
Clearing Members

    Under the proposal, OCC stated that substantially all the cash 
deposits in the Clearing Fund would be held in an account established 
by OCC at a Federal Reserve Bank. OCC proposes that it would pass the 
interest income earned in such account through to its Clearing Members. 
Specifically, OCC proposes to revise Article VIII, Section 4(a) of 
OCC's By-Laws to provide that any interest earned on cash deposits held 
at an account at the Federal Reserve shall accrue to the benefit of 
Clearing Members (calculated daily based on each Clearing Member's pro 
rata share of Clearing Fund cash deposits), provided that such Clearing 
Members have provided OCC with all tax documentation as OCC may from 
time to time require in order to effectuate such payment.
    To accommodate the pass through of interest income, OCC would also 
amend its Fee Policy to add definitions for ``Pass-Through Interest 
Revenue'' and ``Operating Expenses'' to exclude from the calculation of 
the Business Risk Buffer projected interest revenue and expense, 
respectively, related to the pass-through of earned interest from OCC 
to Clearing Members.\8\ OCC also proposes to add a new example of the 
Business Risk Buffer calculation reflecting this change and make 
clarifying changes throughout the policy to incorporate the use of the 
new defined terms. In addition, OCC proposes to amend the Fee Policy to 
remove references to ``Proposed Rule 17Ad-22(e)(15)'' to reflect the 
adoption of the Commission's Covered Clearing Agency Standards.
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    \8\ While interest income earned by OCC from its bank account at 
the Federal Reserve would be passed on to its Clearing Members, OCC 
anticipates that it would charge a cash management fee to cover 
associated costs (i.e., administrative and similar costs). OCC would 
file a separate proposed rule change with the Commission, subject to 
receiving all necessary regulatory approvals for the proposed 
changes described herein, prior to implementing any cash management 
fee
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D. Proposed Conforming Changes

    In conjunction with the aforementioned changes, OCC is also 
proposing to make four related conforming changes. First, OCC proposes 
to revise Interpretation and Policy .01 of Rule 1001 to reflect that 
the new minimum Clearing Fund size is $3 billion (instead of $1 
billion) plus 110% of the size of OCC's committed liquidity facilities, 
which conforms to the Cash Clearing Fund Requirement. Second, OCC 
proposes to amend the definition of ``Approved Custodian'' in Article 
I, Section 1 of the By-Laws to clarify that the Federal Reserve Bank 
may also be an Approved Custodian, to the extent it is available to 
OCC. Third, OCC is proposing to delete existing Article VIII, Section 
4(b), regarding the establishment of a segregated funds account for 
cash contributions to the Clearing Fund. The segregated funds account 
allows a Clearing Member to contribute cash to a bank or trust company 
account maintained in the name of OCC, subject to OCC's exclusive 
control, but the account also includes the name of the Clearing Member 
and any interest accrues to the Clearing Member rather than OCC. OCC 
proposes to eliminate the account type because Clearing Members have 
not expressed interest in using such an account, no such accounts are 
in use today, and moving forward, substantially all cash Clearing Fund 
contributions will held in OCC's account at the Federal Reserve Bank. 
Fourth, OCC proposes to introduce new language to Article VIII, Section 
4(a) to clarify that cash contributions to the Clearing Fund that are 
deposited at approved custodians may be commingled with the Clearing 
Fund contributions of different Clearing Members.

III. Discussion and Commission Findings

    Although the Payment, Clearing and Settlement Supervision Act does 
not specify a standard of review for an advance notice, the stated 
purpose is instructive.\9\ The stated purpose of the Payment, Clearing 
and Settlement Supervision Act is to mitigate systemic risk in the 
financial system and promote financial stability by, among other 
things, promoting uniform risk management standards for SIFMUs and 
strengthening the liquidity of SIFMUs.\10\
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    \9\ See 12 U.S.C. 5461(b).
    \10\ Id.
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    Section 805(a)(2) of the Payment, Clearing and Settlement 
Supervision Act \11\ authorizes the Commission to prescribe regulations 
containing risk-management standards for the payment, clearing, and 
settlement activities of designated clearing entities engaged in 
designated activities for which the Commission is the supervisory 
agency. Section 805(b) of the Payment, Clearing and Settlement 
Supervision Act \12\ provides the following objectives and principles 
for the Commission's risk-management standards prescribed under Section 
805(a):
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    \11\ 12 U.S.C. 5464(a)(2).
    \12\ 12 U.S.C. 5464(b).
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     To promote robust risk management;
     To promote safety and soundness;
     To reduce systemic risks; and
     To support the stability of the broader financial system.

Section 805(c) provides, in addition, that the Commission's risk-
management standards may address such areas as risk-management and 
default policies and procedures, among others areas.\13\
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    \13\ 12 U.S.C. 5464(c).
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    The Commission has adopted risk-management standards under Section 
805(a)(2) of the Payment, Clearing and Settlement Supervision Act and 
the Exchange Act (the ``Clearing Agency Rules'').\14\ The Clearing 
Agency Rules

[[Page 2846]]

require each covered clearing agency, among other things, to establish, 
implement, maintain, and enforce written policies and procedures that 
are reasonably designed to meet certain minimum requirements for 
operations and risk-management practices on an ongoing basis. As such, 
it is appropriate for the Commission to review advance notices for 
consistency with the objectives and principles for risk-management 
standards described in Section 805(b) of the Payment, Clearing and 
Settlement Supervision Act and the Clearing Agency Rules.
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    \14\ 17 CFR 240.17Ad-22. See Securities Exchange Act Release No. 
68080 (October 22, 2012), 77 FR 66220 (November 2, 2012) (S7-08-11). 
See also Securities Exchange Act Release No. 78961 (September 28, 
2016), 81 FR 70786 (October 13, 2016) (S7-03-14) (``Covered Clearing 
Agency Standards''). The Commission established an effective date of 
December 12, 2016, and a compliance date of April 11, 2017, for the 
Covered Clearing Agency Standards. On March 4, 2017, the Commission 
granted covered clearing agencies a temporary exemption from 
compliance with Rule 17Ad-22(e)(3)(ii) and certain requirements in 
Rules 17Ad-22(e)(15)(i) and (ii) until December 31, 2017, subject to 
certain conditions. OCC is a ``covered clearing agency'' as defined 
in Rule 17Ad-22(a)(5).
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A. Consistency With Section 805(b) of the Payment, Clearing and 
Settlement Supervision Act

    The Commission believes the Advance Notice is consistent with the 
stated objectives and principles of Section 805(b) of the Payment, 
Clearing and Settlement Supervision Act of promoting robust risk 
management, promoting safety and soundness, reducing systemic risks, 
and supporting the stability of the broader financial system.\15\
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    \15\ 12 U.S.C. 5464(b).
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    The Commission believes that the Cash Clearing Fund Requirement 
would enhance OCC's ability to manage its liquidity risk exposure, 
thereby promoting robust risk management. Similarly, the Commission 
believes that increasing the amount of cash, and therefore the overall 
amount of qualifying liquid resources, available to cover OCC's 
liquidity demands arising in stressed scenarios is consistent with 
promoting safety and soundness. Based on the analysis provided by OCC, 
the Commission believes that OCC's conclusion is reasonable, i.e., that 
under certain stressed conditions as set forth in the analysis, the 
peak stressed liquidity demands of the largest clearing member could 
exceed the size of OCC's committed liquidity facilities. Moreover, the 
Commission understands that OCC is unable to rely on the fact that 
there will always be deposits of cash in the Clearing Fund sufficient 
to cover such demands because, under its current By-laws and Rules, 
there is no ability for OCC to ensure that a minimum amount of cash is 
maintained in the Clearing Fund at all times. Therefore, there is a 
risk that OCC could face liquidity shortfalls in the event of a default 
by a clearing member whose payment obligations exceed OCC's liquid 
resources. OCC determined to address this risk by proposing to 
establish the Cash Clearing Fund Requirement. Establishing the Cash 
Clearing Fund Requirement would provide OCC with more qualifying liquid 
resources, which, in turn, enhances OCC's ability to cover payment 
obligations that could arise in stressed conditions. Further, the 
proposal to give OCC the authority to temporarily increase the Cash 
Clearing Fund Requirement gives OCC additional means to address 
liquidity shortfalls in extreme scenarios.
    The Commission also believes that the proposed changes are 
consistent with reducing systemic risks and supporting the stability of 
the broader financial system. OCC is the sole registered clearing 
agency for the U.S. listed options markets and a SIFMU. As such, it is 
important for OCC to implement measures that enhance its ability to 
manage risks that could cause a financial loss or settlement disruption 
and threaten the stability of the U.S. listed options markets and the 
broader financial system. The Commission believes that the proposed 
change is designed to enhance OCC's ability to continue to make timely 
settlement of payment obligations and otherwise service the U.S. 
options markets while in the midst of experiencing an extreme market 
event in the form of the default of up to two of its largest clearing 
members. As such, the Commission believes the proposed change is 
consistent with reducing systemic risks and supporting the stability of 
the broader financial system.

B. Consistency With Rules 17Ad-22(e)(7)(i), (iii), and (viii) Under the 
Exchange Act

    The Commission further believes that the proposed change is 
consistent with the Covered Clearing Agency Standards, specifically 
Rule 17Ad-22(e)(7), which requires that a covered clearing agency 
establish, implement, maintain and enforce written policies and 
procedures reasonably designed to effectively measure, monitor, and 
manage its liquidity risk. This includes measuring, monitoring, and 
managing the covered clearing agency's settlement and funding flows on 
an ongoing and timely basis, as well as its use of intraday 
liquidity.\16\ The Division believes that the proposed change is 
consistent with several particular sub-parts of Rule 17Ad-22(e)(7), 
which require that OCC's liquidity risk management policies and 
procedures be reasonably designed to achieve the following:
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    \16\ 17 CFR 240.17Ad-22(e)(7).

     Maintaining sufficient liquid resources at the minimum 
in all relevant currencies to effect same-day and, where 
appropriate, intraday and multiday settlement of payment obligations 
with a high degree of confidence under a wide range of foreseeable 
stress scenarios that includes, but is not limited to, the default 
of the participant family that would generate the largest aggregate 
payment obligation for the covered clearing agency in extreme but 
plausible market conditions; \17\
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    \17\ 17 CFR 240.17Ad-22(e)(7)(i).
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     using the access to accounts and services at a Federal 
Reserve Bank or other relevant central bank, when available and 
where the board of directors of the covered clearing agency has 
determined that it would be practical to enhance its management of 
liquidity risk; \18\ and
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    \18\ 17 CFR 240.17Ad-22(e)(7)(iii).
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     addressing foreseeable liquidity shortfalls that would 
not be covered by a covered clearing agency's liquid resources and 
seeking to avoid unwinding, revoking, or delaying the same-day 
settlement of payment obligations.\19\
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    \19\ 17 CFR 240.17Ad-22(e)(7)(viii).

By proposing the Cash Clearing Fund Requirement, OCC has taken measures 
consistent with the standard in Rule 17Ad-22(e)(7)(i). OCC also 
represented that substantially all of OCC's Clearing Fund deposits 
consisting of cash would be held in an account established by OCC at a 
Federal Reserve Bank and further clarified that interest earned in such 
an account would be paid to its members on a specified basis. By 
proposing to use its access to accounts at a Federal Reserve Bank to 
support the maintenance of the Cash Clearing Fund Requirement, OCC has 
taken measures consistent with the standard in Rule 17Ad-22(e)(7)(iii) 
which provides for using access to a central bank account, where 
available and determined to be practical. Further, the proposed 
authority to temporarily increase the Cash Clearing Fund Requirement is 
intended to address a foreseeable liquidity shortfall and is therefore 
consistent with the requirement in Rule 17Ad-22(e)(7)(viii).

IV. Conclusion

    It is therefore noticed, pursuant to Section 806(e)(1)(G) of the 
Payment, Clearing and Settlement Supervision Act,\20\ that the 
Commission does not object to Advance Notice (SR-OCC-2017-808) and that 
OCC is authorized to implement the proposed change.
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    \20\ 12 U.S.C. 5465(e)(1)(G).

    By the Commission.
Brent J. Fields,
Secretary.
[FR Doc. 2018-00857 Filed 1-18-18; 8:45 am]
BILLING CODE 8011-01-P


